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Inequality and Taxation in a Globalized World
Gabriel Zucman (London School of Economics)
January 20, 2015
Inequality and Taxation in a Globalised World D r Gabriel Zucman - - PowerPoint PPT Presentation
Inequality and Taxation in a Globalised World D r Gabriel Zucman - - PowerPoint PPT Presentation
Department of Economics and Centre For Macroeconomics public lecture Inequality and Taxation in a Globalised World D r Gabriel Zucman Department of Economics, LSE Associate on the Public Economics Programme, STICERD Professor Wouter Den Haan
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Income and wealth inequality have increased a lot in recent decades UK: top 1% income share from 6% in 1970s to 14% today Rising top income shares in all anglo-saxon countries Rising top wealth shares in the US and globally Rising inequality has triggered calls for more redistributive tax policies Higher top marginal tax rates A global wealth tax (Piketty, 2014) ⇓ Is that feasible? Under which conditions?
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At the very top, US back to early 20th century wealth concentration levels
0% 5% 10% 15% 20% 25% 1913 1918 1923 1928 1933 1938 1943 1948 1953 1958 1963 1968 1973 1978 1983 1988 1993 1998 2003 2008 2013 % of total household wealth
Top 0.1% wealth share in the United States, 1913-2012
This figure depicts the share of total household wealth held by the 0.1% richest families, as estimated by capitalizing income tax
- returns. In 2012, the top 0.1% includes about 160,000 families with net wealth above $20.6 million. Source: Appendix Table B1.
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The rise and fall of middle-class wealth in the US
0% 5% 10% 15% 20% 25% 30% 35% 40% 1917 1922 1927 1932 1937 1942 1947 1952 1957 1962 1967 1972 1977 1982 1987 1992 1997 2002 2007 2012
% of total household wealth
Composition of the bottom 90% wealth share
Pensions Business assets Housing (net of mortgages) Equities & fixed claims (net of non-mortgage debt)
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Globalization raises new challenges for tax policy
Tax competition between countries Low tax rates for footballers, researchers, multinational companies... Tax avoidance by multinational companies Exploiting the loopholes of corporate taxes Usually within the letter (but not spirit) of the law Examples: Google, Apple, Amazon... Tax evasion by wealthy individuals Undeclared offshore bank accounts Disconnecting wealth from beneficial owner ⇓ How big are these challenges? And how can they be
- vercome?
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I- Multinational corporations tax avoidance and tax competition
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The taxation of multinationals is based
- n 3 principles adopted in the 1920s
Source-based taxation
Taxes are to be paid to countries where profits have been made Not to countries where shareholders live (= residence taxation) But how to determine where the profits have been made?
Arm’s length pricing
Subsidiaries of a same group must compute their profits as if unrelated I.e., trade goods and services internally at market prices
Bilateral agreements
No multilateral agreement like GATT Instead, thousands of bilateral tax treaties
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The choices made in the 1920s are coming back to haunt the tax authorities
0% 5% 10% 15% 20% 25% 30% 35% 1930-39 1940-49 1950-59 1960-69 1970-70 1980-89 1990-99 2000-09 2010-13
% of U.S. corporate profits
The share of profits made abroad in U.S. corporate profits
Notes: The figure reports decennial averages (e.g., 1970-79 is the average of 1970, 1971, ..., 1979). Foreign profits include dividends on foreign portfolio equities and income on US direct investment abroad (distributed and retained). Profits are net of interest payments, gross of US but net of foreign corporate income taxes. Source: author's computations using NIPA data, see Online Appendix.
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Each of the 3 core principles for international taxation raises its own issues
Bilateral agreements
Treaty shopping to generate stateless income Example: Google
Arm’s length pricing
Easy to manipulate transfer prices Reference prices often do not exist
Source-based taxation
Artificial profit shifting Tax competition for real investments
⇓ The way we tax corporations is not adapted anymore to today’s globalized world
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What is the cost of multinational corporate tax avoidance?
Hard to quantify: double-counting issues, tax laws vary substantially across countries, etc. My approach: use national accounts and balance of payments data Focus on the United States: what is happening to the profits of US-owned companies? ⇓ Latest data show offshore tax avoidance is sizable and growing fast
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More than half of the foreign profits of US-owned firms are booked in tax havens
0% 10% 20% 30% 40% 50% 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
% of U.S. corporate profits made abroad
The share of tax havens in U.S. corporate profits made abroad
Singapore Ireland Netherlands Luxembourg Switzerland Bermuda (and other Caribbean)
Notes: This figure charts the share of income on U.S. direct investment abroad made in the main tax havens. In 2013, total income on U.S.DI abroad was about $500bn. 17% came from the Netherlands, 8% from Luxembourg, etc. Source: author's computations using balance of payments data, see Online Appendix.
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20% of all US corporate profits are booked in tax havens
0% 5% 10% 15% 20% 25% 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
% of US corporate profits
The share of tax havens in U.S. corporate profits
Notes: This figure charts the ratio of profits made in the main tax havens (Netherlands, Ireland, Switzerland, Singapore, Luxembourg, Bermuda and other Caribbean havens) to total US corporate profits (domestic plus foreign). Source: author's computations using NIPA and balance of payments data, see Online Appendix.
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The effective rate paid by US corporations has been reduced by 1/3 since late 1990s
0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% 55% 1950-59 1960-69 1970-70 1980-89 1990-99 2000-09 2010-13
% of US corporate profits
Nominal and effective corporate tax rates on US corporate profits
Nominal U.S. federal rate Effective rate paid to US government Effective rate paid to US and foreign gov.
Notes: The figure reports decennial averages (e.g., 1970-79 is the average of 1970, 1971, ..., 1979). In 2013, over $100 of corporate profits earned by US residents, on average $16 is paid in corporate taxes to the U.S. government (federal and States) and $4 to foreign governments. Source: author's computations using NIPA data, see Online Appendix.
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There is no shortage of plans to fix the corporate tax
Repeal of the corporate tax Would undermine the individual income tax Could have large effects on inequalities More harmonization of treaty rules Strengthening of arm’s length rules OECD base erosion and profit shifting Effective?
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The way forward: tax worldwide consolidated profits
A simple solution to artificial corporate profit shifting Start from global consolidated profits of firms Then allocate to each country using some formula For instance, sales only (like for US States) More complicate formulas: employment, capital, sales... ⇓ Would remove any tax avoidance opportunity
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II- Tax evasion by wealthy individuals
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A growing fraction of wealth is being managed by offshore financial institutions
0% 2% 4% 6% 8% 10% 1940 1950 1960 1970 1980 1990 2000 2010
% of U.S. equity market capitalization
In 2012, 9% of the U.S. listed equity market capitalization was held by tax haven investors (hedge funds in the Cayman Islands, banks in Switzerland, mutual funds in Luxembourg, individuals in Monaco, etc.). Source: author's computations using US TIC data
U.S. equities held by tax haven firms and individuals
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What do offshore centers do?
A great deal of activities, many of which legal and legitimate: Investment funds (Luxembourg, Ireland...) Shadow banking (Caymans...) Treasury management (U.S.-Cayman...) Personal wealth management (Switzerland, Singapore...) But some offshore centers, institutions and instruments also facilitate tax evasion by wealthy individuals
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How offshore tax evasion works
Shell companies Fake invoices Offshore accounts Disconnecting legal and beneficial ownership
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What do we know about the magnitude
- f offshore tax evasion?
Monthly statistics by the Swiss National Bank Systematic anomalies in the international investment positions of countries caused by offshore portfolio wealth Example: UK-Switzerland-US 8% of the world’s financial wealth offshore; if anything lower bound Limited evidence on what fraction evades taxes (maybe 90-95% prior to 2008, down to 80% today?)
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8% of the world’s financial wealth is held
- ffshore, costing at least $200bn
Offshore wealth ($ bn) Share of financial wealth held
- ffshore
Tax revenue loss ($ bn) Europe 2,600 10% 75 USA 1,200 4% 36 Asia 1,300 4% 35 Latin America 700 22% 21 Africa 500 30% 15 Canada 300 9% 6 Russia 200 50% 1 Gulf countries 800 57% Total 7,600 8.0% 190
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Despite recent policy initiatives, much remains to be done
Automatic exchange of bank information may become global standard by end of 2010s: a huge step forward Still three obstacles: Securing compliance from offshore bankers Addressing the opacity of international financial record-keeping Making sure offshore banking does not move to uncovered jurisdictions ⇓ A world financial registry would make it possible to measure wealth and fill in the giant gaps in international data
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A world financial registry
What is it? Same as land registries, but for financial assets On a beneficial ownership basis What’s the goal? Measure wealth better Stakes go way beyond tax evasion Is it possible? Partial registries already exist today Simply need to be merged and transferred to a public authority
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Supplementary Slides
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How Google avoids taxes: the double Irish Dutch sandwich
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- 30%
- 20%
- 10%
0% 10% 20% 30% 40% 50% 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
% of US corporate profits made abroad
U.S. corporate profits retained in tax havens
Repatriation tax holiday
Notes: This figure charts the ratio of US direct investment income reinvested in the main tax havens (Netherlands, Ireland, Switzerland, Singapore, Luxembourg, Bermuda and
- ther Caribbean havens) to total US direct investment income abroad.The negative amount of reinvested earnings in 2005 means that, out of 2005 production, U.S. firms
repatriated more that 100% of the 2005 profits of their foreign affiliates (i.e., the 2005 data point excludes repatriations from profits made prior to 2005). Source: author's computations using balance of payments data, see Online Appendix.
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